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Notes & Trends Headline
May/June 2001

"Notes & Trends" presents commentaries current
at the time of publication.
--Ed.

CIVIL LITIGATION
Judicial Law


Sufficiency of Service of Process. The Minnesota Court of Appeals reversed the trial court and dismissed a lawsuit for insufficiency of service of process. Linda K. Schneider-Janzen was the driver and sole owner of an automobile that collided with another car driven by Mary Lou Van Slooten. Both drivers were injured. Schneider-Janzen and her husband sued Van Slooten for damages resulting from the collision. Van Slooten did not counter-claim. At trial a jury found Schneider-Janzen totally at fault for the accident, so there was no recovery. Schneider-Janzen died following the trial and there was no probate of her estate nor a personal representative ever appointed

One month prior to the running of the six-year statute of limitations for negligence claims, a sheriff delivered to Schneider-Janzen's widower, Daniel Janzen, a Summons and Complaint brought by Van Slooten against Schneider-Janzen. Daniel Schneider told the sheriff that Schneider-Janzen had passed away. After the expiration of the statute of limitations Van Slooten then served Daniel Janzen with Amended Summons and Complaint naming as defendant the Estate of Schneider-Janzen and Daniel Janzen as personal representative. Neither Janzen nor anyone else was ever formally appointed as the personal representative of the estate. In his Answer, Janzen asserted defenses of insufficiency of service of process and statute of limitations and then moved to dismiss the action for lack of sufficiency of service of process. The trial court denied defendant's motion.

On appeal the Minnesota Court of Appeals explained that if a defendant dies prior to the commencement of a lawsuit, the claim against that decedent abates. The survivorship statute, Minn. Stat. ¤ 573.01 provides that a claim against a decedent may be brought only against the personal representative of the decedent's estate and may not be commenced before the appointment of the personal representative. Because Van Slooten did not commence the action against Schneider-Janzen during her lifetime, nor against a duly appointed personal representative after her death, the service of process on Janzen was not sufficient to commence the action against the estate of Schneider-Janzen. His motion to dismiss should have been granted.

Nor does the doctrine of "relation-back" apply because no action had been properly commenced in the first instance. Van Slooten v. Estate of Schneider-Janzen, 623 N.W.2d 269 (Minn. App. 2001)

Municipal Discretionary Immunity. The plaintiff's home in Albert Lea was damaged when a sanitary sewer backed up during the 1997 flood. The homeowners sued the city. Albert Lea moved for summary judgment on the ground that it was entitled to statutory immunity. The trial court denied the motion, but the Court of Appeals reversed.

Discovery revealed that the involved neighborhood suffered periodic flooding over the years and residents were encouraged by the city to move out of the area in 1978. After an engineering study of the sewer systems in 1975 the city spent $33 million to construct a wastewater treatment plant. Nevertheless, in 1993 there were infiltration problems as a result of flooding and the city addressed these issues and took corrective action. Despite the corrective measures, the system once again was unable to handle the 1997 flood.

The Court of Appeals granted the city's appeal, holding that it was entitled to statutory discretionary immunity pursuant to Minn. Stat. ¤ 466.03 subd. 6 (2000). The court found that the conduct in question involved a combination of policy-making and operational decisions when the city decided how to maintain its sewage system. Christopherson v. City of Albert Lea, 623 N.W.2d 272 (Minn. App. 2001)

Punitive Damages; Damage to Property Only. The Supreme Court recently reversed the Court of Appeals and the trial court and remanded the case for reconsideration of plaintiff's motion to amend their Complaint to include a claim for punitive damages, where the sole claim was for intentional damage to property. The action arose from a bitter dispute between neighbors who owned land along the Mississippi River. The record disclosed numerous intentional acts alleged to have been committed by defendants against plaintiffs' property. Plaintiffs moved to amend their Complaint to include a claim for punitive damages. The motion was denied by the trial court, which concluded that punitive damages are not available where the only damage is to property. The Court of Appeals affirmed the partial summary judgment dismissal.

The Supreme Court reviewed the availability of punitive damages under the common law, tracing such claims back more than 100 years. Our courts have in the past permitted claims for punitive damages where the only the damage is to property. In reaction to the perceived product liability crisis, in 1978 the Legislature enacted limits to civil actions for punitive damages, with additional amendments in 1990. However, the statute is silent with respect to claims for property damage only. However, in Eisert and Keene, the Court refused to allow claims for punitive damages in property damage cases. In distinguishing the present case, the court reasoned that the focus in the earlier decisions was on the product liability crisis, which was not a concern in this case, and that the statute permits claims for punitive damages if there is clear and convincing evidence that the tortfeasor acted with deliberate disregard for the rights or safety of others, regardless of the nature of the resulting damage. Jensen v. Walsh, 623 N.W.2d 247 (Minn. 2001)

-- Steven J. Kirsch
-- Andrew T. Shern
Murnane, Conlin, White & Bradt

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CRIMINAL LAW
Judicial Law

Search and Seizure: Automobile Stop: Anonymous Tip. Dispatch sent out an "attempt to locate" for a car traveling on Highway 12 in the Willmar-Atwater area. The car was reported to be driving "all over the road." The car was further described as a red Plymouth, and its license plate number was given. The dispatch did not include any information about the identity of the reporting motorist and it is unknown whether state patrol received this identity when the information was originally phoned in.

An Atwater police officer who had been monitoring the dispatch saw an approaching red vehicle cross the fog line and come back across its lane to the center line. The officer noted the license plate number, which matched that of the dispatch.

Held, this stop was supported by a particularized and objective basis for suspecting the particular person stopped of criminal activity. The police officer observed independent driving violations and, together with the information that the officer received from dispatch, there was sufficient basis for stopping the vehicle. This case is distinguished from Olson v. Commissioner of Public Safety, 371 N.W.2d 552 (Minn. 1985), because in this case the officer had independent observations of erratic driving, the anonymous tip notwithstanding. State v. Dennis Eugene Richardson, 622 N.W.2d 823 (Minn. 2001) (filed 3/15/01).

DWI/Implied Consent: Intoxilyzer: Software Approval. The Court of Appeals rejects the appellant¹s argument that the Intoxilyzer 5000 Series 68 has not been properly approved because the commissioner has failed to adopt a formal rule. The Intoxilyzer 5000 was originally approved in 1985 by an administrative rule. In 1999, the commissioner issued "Order No. 101b" clarifying the rule and approving the software upgrades and changes to the machine itself. The court defers to the commissioner¹s construction of the original rule and concludes that the order was appropriate without employing a formal rule-making process. Travis Scott Schuster v. Commissioner of Public Safety, 622 N.W.2d 844 (Minn. App. 2001) (filed 3/13/01).

Procedure: Notice to Remove: Grand Jury. On January 6, 2000, Judge Tilsen was assigned to handle a second-degree murder case. On March 9, 2000, a dispositional conference was held at which not only scheduling matters were discussed, but also extensive plea negotiations. On March 30, 2000, the defendant appeared before Judge Tilsen, but the state was not present. Shortly after, the defense and prosecution engaged in further plea negotiations. On April 5, 2000, the defendant appeared before the judge, stating he was prepared to plead guilty to the second-degree murder charge "straight up." The prosecution was present and indicated that it was not prepared to accept such a plea, to which the judge ruled that the defendant had the right to plead to the charges at any time, pursuant to Minn. R. Crim. P. 8.01.

Before the defendant could enter the plea, however, the state dismissed the charges and the court ordered the defendant released. At the proceeding, Judge Tilsen explained that the state should have given notice to the court of its intent to proceed to a grand jury within 14 days of the related appearance, pursuant to Rule 8.01. The judge also noted that she felt that the state had negotiated in bad faith.
On May 3, 2000, the defendant was indicted on six counts of murder, including First Degree Murder. On May 9, 2000, the state filed a notice to remove Judge Tilsen. Judge Tilsen refused to honor the notice to remove. The Court of Appeals granted a writ of prohibition for the state.

Held, it was improper for the Court of Appeals to issue a writ of prohibition. The rule allowing for the removal of judges will be construed narrowly. The Supreme Court concludes that the state¹s notice to remove was untimely. The sequence of events in this case that led the state to remove Judge Tilsen was such that an indictment against the defendant was not a new proceeding. The judge had already presided over and taken part in significant substantive issues concerning the case, including a dispositional conference, scheduling discussions, and extensive plea negotiations. Reversed and remanded. State v. Mong Danny Cheng, 623 N.W.2d 252 (Minn. 2001) (filed 3/22/01).

Procedure: Formal Complaint: Petty Misdemeanor: 30-Day Rule. Defendant had been charged with a petty misdemeanor speeding charge. On June 1, 2000, by letter, the defendant demanded discovery and a formal complaint. On June 13, 2000, the city provided discovery but refused to issue a formal complaint. The city also obtained an ex parte continuance of trial date for July 5, 2000. On June 26, 2000, defendant filed a notice of motion and motion asking the court to dismiss the tab charge because of the prosecution's failure to file a formal complaint and because the ex parte communication by the prosecutor was with the clerk.

Held, the district court erred in denying the issuance of a formal complaint, and by failing to dismiss when the formal complaint was not provided. The rules of criminal procedure for petty misdemeanors are the same as for misdemeanors. Minn. R. Crim. P. 23.05, subd. 3. In a misdemeanor case, the accused has the right to a formal complaint within 30 days after demand. Minn. R. Crim. P. 4.02, subd. 5(3). State v. David Richard Loeffler, 2001 WL 267276 (Minn. App. 2001) (filed 3/20/01).

Juvenile: EJJ: Jurisdiction: Probation Violation. A juvenile court retains jurisdiction over an individual who has turned 21 where EJJ ("extended jurisdiction juvenile") juvenile probation revocation proceedings were commenced before the individual¹s 21st birthday, and any delay was not the result of an improper state purpose. Minn. Stat. ¤ 260B.193, subd. 5c is "instructive," because it allows an original petition in delinquency to be filed before the adult¹s 21st birthday in EJJ cases. Because a new proceeding can be filed against the child who has turned 21, it is "reasonable that the court also has jurisdiction to complete an EJJ probation revocation proceeding that was commenced before the individual¹s 21st birthday." To do otherwise would have the disfavored result of allowing an offender to go "home free" by running out the clock. In re V.D.M.,623 N.W.2d 277 (Minn. App. 2001) (filed 3/20/01).

Evidence: Opinion Testimony: Guilt of Defendant. In a pretrial ruling, the trial court determined that the investigating sergeant may not make statements as to opinion concerning the appellant¹s guilt. The prosecutor was ordered to caution the sergeant that when he testifies, "such opinions are his alone and are to be kept to himself."

During direct examination, however, the sergeant stated that he told a victim: "I believed it was [appellant] that assaulted her." Following an objection, the court ordered the response stricken and instructed the jury that the opinion was not evidence.

In spite of these curative steps, the sergeant¹s testimony was egregious, and a direct violation, either by the prosecutor or by the witness, of the judge¹s instructions. Such an opinion prevented the appellant from receiving a fair trial. The conviction is reversed and remanded. State v. William John Hogetvedt, 623 N.W.2d 909 (Minn. App. 2001) (filed 3/27/01).

Gang: Expert Opinion. The trial court allowed a lieutenant deputy with the Clay County Sheriff¹s Department, assigned to the Minnesota Gang Strike Force, to testify about his familiarity with the criminal activities of the Villa Lobos gang, and that he has arrested many of its members. He stated that in his opinion, the Villa Lobos is a criminal gang. The appellant had been charged with a drive-by shooting committed for the benefit of a gang, under Minn. Stat. ¤ 609.229, subd. 2.

Held, it was not an abuse of discretion to allow this expert testimony. The key for such opinion testimony is whether it is helpful to the trial of fact. The makeup and dynamics of a criminal gang are beyond the experience of the average lay juror, and it was helpful to the jury to determine whether a particular group is a criminal gang, as well as describing the primary activities of that particular group or association. State v. Richard James Carillo, 623 N.W.2d 922 (Minn. App. 2001) (filed 4/3/01).

Impeachment: Testimony: Payoff for Testimony. At trial, the defendant attempted to admit an out-of-court statement by one of the state¹s witnesses, that she had offered to change her testimony in exchange for money. The trial court disallowed this statement as hearsay.

Held, it was error to exclude this statement, because it is not hearsay. An out-of-court statement offered not to prove the truth of the matter asserted, but rather for impeachment purposes, falls outside of the hearsay rule, citing State v. Hanley, 363 N.W.2d 735, 740 (Minn. 1985). Here, the witness's statement was offered for the impeachment purpose to show her veracity or bias rather than to prove the truth of the matter asserted. Furthermore, defense counsel probably does not need to lay a foundation before eliciting this testimony. State v. Carillo, supra.

First-Degree Assault: Deadly Force: Knife. During a confrontation in the respondent¹s apartment, the respondent held two large kitchen knives roughly at the height of his head, with the blades pointing down. He then took two quick steps toward police, while uttering the phrase "bring it on, f***er," and moved the knives in an up and down motion.

This action was sufficient to charge the respondent with first-degree assault. There was no dispute that the respondent made a quick movement toward the police with the knives in his hands, while uttering words evincing an attempt to engage the police in combat. A jury could easily find that this was more than mere preparation, but rather a substantial step toward the commission of a crime. The trial court should not have dismissed the complaint. State v. Jeremiah John Trei, 624 N.W.2d 595 (Minn. App. 2001) (filed 4/10/01).

Manslaughter: Heat of Passion: Transferred Intent. In a murder prosecution, the appellant contended that he flew into a rage after hearing that his former girlfriend was HIV positive. After hearing this, the appellant killed his former girlfriend, her unborn child, and the two-year-old son of the appellant and the victim. The appellant testified at trial that he "lost it."

The trial court refused to allow a heat-of-passion jury instruction (lesser included offense of first-degree manslaughter) relating to the murder of the two-year-old child, finding that there is no transference of the heat-of-passion element from the person who provokes the conduct to a third party who is not involved in the provocation.
Held, it was error for the trial court to decline such a jury instruction based upon the transference-of-intent theory. The court holds that Minn. Stat. ¤ 609.20 allows for the defense that the victim and the provocateur need not be the same person, and the mitigating consequences of heat of passion, provoked by one party, may be transferred to assaultive conduct against someone other than the provocateur.

However, no reasonable jury could have concluded, under the circumstances at the time of the killing, that the appellant acted in the heat of passion as against the two-year-old child. State v. Michael Charles Stewart, 624 N.W.2d 595 (Minn. 2001) (filed 4/19/01).

Sentence: Appeal by State: Gross Misdemeanor Sentence. The trial court sentenced the respondent to one year in the workhouse, with work-release privileges. The sentences were handed down for gross misdemeanor driving after cancellation and refusal to test, and were in the nature of executed sentences. The respondent was unsuccessful in obtaining employment, and the trial court later, sua sponte, furloughed the respondent from jail, but still subject to electronic home monitoring. The state appealed the trial court¹s denial of its motion to reconsider the sentence.

Held, because the state has no right to appellate review of the trial court¹s gross misdemeanor sentence modification, its appeal is dismissed. While the state may appeal from any sentence "according to the rules of criminal procedure," Minn. Stat. ¤ 244.11, subd. 1, Minn. R. Crim. P. 28.04, subd. 1(2), & (3) provides the state with the right to appeal only in felony cases. The court rejects the state¹s argument that this was, in effect, a post-conviction proceeding. State v. Willie Dee Loyd, 2001 WL 379876 (Minn App. 2001) (filed 4/17/01).

Dangerous Weapon: School Property: Burden of Proof. P.W.F, a high school student, inadvertently brought a folding pocket knife to school. This knife had a three-inch sharpened blade. He placed the knife in his locker for the entire day. After school, he went to a friend¹s house, where he left the knife before returning to school for a dance. Appellant¹s friend gave the knife to her mother, who reported to the school that the appellant had brought the knife to school. Appellant was charged with possession of a dangerous weapon on school property, a felony violation of Minn. Stat. ¤ 609.66, subd. 1d(a). The trial court concluded that the appellant possessed a dangerous weapon on school property.

Held, the state did not present sufficient evidence to demonstrate that the appellant possessed a "dangerous weapon" on school property. Under the statute¹s definition, it is undisputed that the appellant's knife is not a firearm, or a fire, and there is no claim that the appellant used or intended to use the knife to produce death or great bodily harm. The only issue for the definitional test, then, is whether it was designed as a weapon and capable of producing death or great bodily harm. The state did not submit any evidence that this pocketknife was designed as a weapon. The court may not have taken judicial notice of any such fact, because judicial notice is normally inappropriate for criminal settings, and whether the appellant¹s knife was designed as a weapon was a disputed issue in the trial court. In re P.W.F., 2001 WL 378834 (Minn. App. 2001) (filed 4/17/01).

-- Frederic Bruno, Esq.
Frederic Bruno & Associates

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ELDER LAW
Administrative Law

Annuities. The Health Care Financing Administration (HCFA) has amended the State Medicaid Manual at Section 3810 to permit recovery from annuities that are the property of the deceased Medicaid beneficiary. In order to begin recovery, the state must have an expanded definition of an estate and must meet applicable notice and due process requirements.

Judicial Law

Pre-Conservatorship Deed Voided. A district court may void a transaction entered into by a conservatee during the two years before establishment of a conservatorship if the court finds the conservatee was incompetent at the time. Minn. Sat. ¤ 525.56, subd. 5 (2000). The court ordered appellant to sign a Quit Claim Deed conveying his interest in the homestead back to his mother, the conservatee. Appellant executed the deed, but one day later obtained another deed from his mother. The district court found the son to be in contempt of court, and the Court of Appeals affirmed. Meireles, as Conservator of the Estate and Person of Tamasy v. Tamasy, C8-00-1532, 2001 WL 267466 (March 20, 2001).

-- Tonya Zdon Gabbard
Garvey & Boggio, PA

EMPLOYMENT & LABOR LAW
Judicial Law

Whistleblower Act.Continuing a trend of rulings of adverse to workplace whistleblowers, the Minnesota Court of Appeals recently reversed a large jury verdict in favor of a public sector employee under the Whistleblower Act, Minn. Stat. ¤ 181.932. In Cokley v. City of Otsego, 623 N.W.2d 625 (March 6, 2001), an employee's complaints about overtime wage requirements, safety features, and the contractual status of a building inspector were not actionable under the statute because they were not sufficiently specific, did not reflect actual violations of law, or were already known by management. Therefore, they did not satisfy the statutory requirement of "good faith" reports to management about illegalities in the workplace.

Academic Affairs. A teacher who was criminally charged for improperly touching an elementary school student is entitled to pursue a defamation claim against the media for reporting that the educator was accused of "having sex" with a student. In Partch v. Hubbard Broadcasting Inc., 2001 Minn. App. Lexis 248 (unpublished), the appellate court overruled the trial court's dismissal on the grounds that the report was substantially true. The appellate court reasoned that the "gist" of television and newspaper reports were not "substantially" accurate because the term "having sex," as reported by the media, far exceeds the scope of the allegation against the teacher.

A discharged teacher who sought to appeal an arbitration upholding his dismissal is entitled to pursue the challenge even though the appeal was not filed until nearly eight months after the award was issued. In Cianflone v. Ind. Sch. Dist. No. 112, 2001 WL 215711 (Minn. App. 2001) (unpublished), the arbitrator sent the award upholding the discharge to the attorneys for the teacher and school district but it was not received by the teacher until several months later. The teacher then appealed within seven weeks of actually receiving it. The appellate court ruled that the appeal was timely under the Uniform Arbitration Act, Minn. Stat. ¤ 572.15(a) which requires an appeal to be filed with 90 days. The 90-day period does not begin until the arbitration award is personally served or sent by certified mailed directly to the parties, not their attorneys.

A school district has the inherent managerial authority to eliminate the position of an elementary school principal. In Quiring v. Ind. Sch. Dist. No. 173, 2001 WL 267461, the appellate court rejected a challenge by a displaced principal, holding that the termination of the position due to budgetary cutbacks and declining enrollment did not have to be negotiated with the principal's union.

A teacher who does not challenge a lay-off due to low seniority under his labor contract forfeits his right to the job. In Abeln v. Ind. Sch. Dist. No. 276, 2001 WL 243202 (Minn. App. 2001) (unpublished), the Court of Appeals held that the teacher waived his rights to challenge the lay-off because he did not grieve the "accuracy" of his position on the seniority list under his collective bargaining agreement.
A teacher cannot exercise seniority "bumping rights" for a supervisory position if doing so could result in scheduling problems. In Moe v. Ind. Sch. Dist. No. 696 (Ely), 2001 WL 290493 (Minn. App. 2001), the appellate court upheld a partial lay-off of a veteran teacher because allowing her to take over supervisory duties of less senior teachers was not compatible with the curricular scheduling.

Harassment. When the same factual allegations underlie an employee's sexual harassment claims under Title VII of the Federal Civil Rights Act and state law claims against a supervisor, the federal claim preempts the state claim. In Mathis v. Dick, 243 F.3d 446 (8th Cir. March 14, 2001), the 8th Circuit held that an employee does not have "carte blanche" to assert state law claims when the same facts give rise to a Title VII claim.

-- Marshall Tanick
Mansfield, Tanick & Cohen, P.A
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ENVIRONMENTAL LAW
Administrative Law

Federal Wetland Jurisdiction. The EPA/Army Corps of Engineers' "Tulloch Rule," which expands the definition of "discharge of dredged material," became effective on April 17, 2001, after being delayed for 60 days. "Further Revisions to the Clean Water Act Regulatory Definition of 'Discharge of Dredged Material': Delay of Effective Date" 66 Fed. Reg. 10,367 (2001) (to be codified at 33 C.F.R. ¤ 323.2 and 40 C.F.R. ¤ 232.2).

The rule amends the definition of "discharge of dredged material" in Clean Water Act Section 404 regulations such that the use of mechanized earth-moving equipment in waters of the United States will require a permit under Section 404 unless project-specific evidence shows that the activity will result in only "incidental fallback." The rule essentially defines incidental fallback as small amounts of material that fall back into substantially the same place as the initial removal. The rule is consistent with the 1998 ruling of the District of Columbia Circuit Court of Appeals in National Mining Assn. v. Corps of Eng'rs, 145 F.3d 1399 (D.C. Cir. 1998), holding that federal agencies lacked authority under the Clean Water Act to regulate activities in waters of the United States if the activities resulted only in incidental fallback. The rule seeks to clarify the scope of activities that are likely to result in discharges regulated under the Clean Water Act and to curb practices that the EPA and Corps say resulted in the destruction of 20,000 acres of wetlands since 1998.

Judicial Law

Retroactive Application of CERCLA. Retroactive application of CERCLA to recover cleanup costs from responsible parties does not violate either the Due Process or Takings clause of the United States Constitution. Franklin County Convention Facilities Authority v. Amer. Premier Underwriters, Inc., 240 F.3d 534 (6th Cir. 2001).

In 1990, a contractor for plaintiff Franklin County Convention Facilities Authority ("CFU") was digging on property owned by the city of Columbus, Ohio, and leased by CFU. The contractor split open a box containing creosote and benzene, which had been buried prior to 1901. CFU brought a cost-recovery action under CERCLA Section 107(a) against defendant American Premier Underwriters ("APU") as the corporate successor to the railroads that had previously operated on the property.

Since the box was buried long before the effective date of CERCLA, APU argued that retroactive application of CERCLA violates substantive due process and constitutes a taking under the 5th Amendment of the Constitution. The 6th Circuit rejected APU's argument, holding that retroactive application was consistent with Congress' intent to distribute cleanup costs amongst responsible parties.

Divisibility of Harm Defense Allowed in cercla Action. The divisibility of harm doctrine may be used to apportion damages in a CERCLA action, rather than holding all defendants jointly and severally liable for cleanup costs. U.S. v. Hercules, 2001 WL 345838 (8th Cir., Apr. 10, 2001).

The federal government and state of Arkansas brought a cost-recovery action against numerous defendants for cleanup of hazardous substances at the site of a former chemical plant. Defendant Hercules had stored and buried drums on the site, which contained chemicals including dioxin. The subsequent owner did the same, resulting in widespread contamination of soils and groundwater at the site and neighboring properties. The EPA eventually took over the site and undertook cleanup at a cost exceeding $100 million. The district court granted summary judgment against defendant Hercules, holding Hercules jointly and severally liable for all damages, despite Hercules' claim that the harm was divisible and that Hercules should be liable for only those damages resulting from its actions.

The 8th Circuit Court of Appeals reversed the grant of summary judgment and remanded the case for reconsideration of the facts supporting Hercules' divisibility defense. The court had not previously been presented with the question of whether a divisibility defense should be allowed in a CERCLA action, but the court cited cases from other circuits in which the defense had been recognized and also cases in which the 8th Circuit Court of Appeals had expressed approval of the doctrine. The court held that the divisibility doctrine is compatible with CERCLA's overall statutory scheme and is also "a sensible way to avoid imposing on parties excessive liability for harm that is not fairly attributable to them."

-- Robert F. Devolve
-- Nicholas W. Chase
Leonard, Street & Deinard PA

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FAMILY LAW
Judicial Law

Child Support. The physical custody of the three children was awarded to the mother in the decree, which ordered the father to pay child support. Four years later, physical custody was changed to the father, who was ordered to pay child support to the mother. One year later, he petitioned for termination of his child support obligation and to be granted the dependency exemptions for his children. Both requests were denied. The Court of Appeals approved the order, subject to remand of the mother's income determination and the award of the dependency exemptions. The Supreme Court found that the heart of the appeal is whether Minnesota's child support scheme has been properly applied.

The Court began its analysis with the child support guidelines, which have established a rebuttable presumption that the obligor owes a statutorily fixed percentage of income based on the number of children. To overcome the presumption and deviate from the statute, the court must make written findings explaining how the children's best interests are served. It has been presumed that a sole custodian will spend the appropriate amount directly on the children and an order is not necessary. (Minnesota does not expressly provide a formula addressing support where both parents have extensive custodial privileges. In such cases, a formula called Hortis/Valento has evolved from appellate court opinions. Those opinions have interpreted the guidelines to require each partner with joint physical custody to pay statutory support during the time that the children spend with the other parent. The Court of Appeals recently has extended the Hortis/Valento formula beyond physical custody.)

In the instant case, the mother retained visitation rights approximately 45 percent of the time. The father did not request support; however, the district held that it was in the children's best interests that the father pay some support to help meet the mother's housing expense based on the Hortis/Valento formula. Forty-five percent of the father's guidelines obligation was $943; fifty 55 percent of the mother's obligation was $341; therefore, the father was obligated to pay her the difference of $593 per month. The trial court also denied the father's request for the three dependency exemptions and awarded one to the mother.

On appeal, the father challenges the holding that Hortis/Valento is an application of the guidelines. The Supreme Court turned to the 1998 amendment providing that a person with sole physical custody is presumed not to be a child support obligor and is not required to pay support unless the court makes specific findings. It concluded that the amendment's emphasis on whether physical custody is sole or joint strongly suggests legislative dissatisfaction with the extension of the Hortis/Valento formula and the intention that the percentage of time spent with the noncustodial parent not be the determinative factor in the statutory scheme. Time spent may be considered only in the context of applying the six statutory factors in determining the amount of support or in deciding whether a deviation from the guidelines should be approved. The Court held that the application of the Hortis/Valento rule where one has sole physical custody is a deviation from the guidelines that must be supported by findings reflecting consideration of the statutory factors. It also reversed the Court of Appeals reversal of the district court's award of dependency exemptions. Rogers v. Rogers, C2-99-1325, 622 N.W.2d 813 (Minn. 2001) (filed 3/8/01).

Property Valuation. The trial court used the after-tax value of the retirement plan assets in calculating the value of the parties' marital assets. The husbands CPA testified that the four deferred compensation plans can be withdrawn only upon retirement, disability, death, or an unforeseeable emergency and that any withdrawal would be taxable as ordinary income at the combined marginal income tax rate of 35 percent. The court found that the after-tax value of the $98,406 value of the plans would be $63,964 at that rate. The Court of Appeals reversed after holding that the action was speculative because there was no evidence that a taxable event was required by the decree or certain to occur shortly after its entry.

The Supreme Court examined its consideration of tax consequences and speculation under a line of its opinions beginning with Aaron v. Aaron. The husband in Aaron failed to show that he needed to or intended to sell his real estate. The court held it was not an abuse to refuse to consider taxes in light of that evidence. But it added that it was not holding that in a proper case the court should not consider taxes -- indeed it should. Its concern was speculation in the form of reliance on generally insufficient evidence. The Supreme Court noted that other jurisdictions are divided on future tax consequences. Some consider it too speculative because tax rates can change; others have concluded that the uncertainty is outweighed by the fact it is practically certain that the asset will be taxed. As one court aptly put it, because it is a virtual certainty that the owner will not receive his retirement funds free of income tax, the only question is what the probable tax liability will be. Our court found this reasoning persuasive. It added that it also is important to note that retirement assets have little or no value until funds are withdrawn, which, ironically, is the event that triggers their taxation. The Supreme Court concluded that it would be inequitable to preclude a trial court from considering future taxes when there is a reasonable and supportable basis for making an informed judgment. It held that the trial court's consideration of taxes was not speculative and the application of the 35 percent marginal rate was not an abuse of its discretion. There was no evidence in the record to support a lower tax rate. Three justices joined in a concurring opinion emphasizing the decision is not a departure from the general rule. Maurer v. Maurer, C7-99-1319, 623 N.W.2d 604 (Minn. 2001) (filed 3/22/01).

Custody. The district court placed sole physical custody of the son with his father premised primarily on a uniquely close emotional relationship which, if upset, would be detrimental to the child. Initially, the father had tried to alienate the son from his mother and her family but subsequently put aside his anger and encouraged a positive relationship between mother and son. He also shared custody during the pendency of this proceeding. On appeal, the mother argued that the trial court abused its discretion as a matter of law because the father-child bond is the product of alienation, which is a question of first impression in Minnesota. The Court of Appeals found that the paramount consideration in any custody decision is the best interests of the child and that no single statutory factor can be determinative. It concluded that children are not responsible for their parents' misconduct, and their best interests should not be sacrificed merely to punish a misguided parent. In addition, the appellate court found that, under Minnesota law, proof of unwarranted denial of or interference with established visitation rights may be sufficient cause for reversal of custody. Therefore, alienation of affection does not automatically justify a change of custody. Affirmed. Lemcke v. Lemcke, C0-00-1170, 623 N.W.2d 916 (Minn. App. 2001) (filed 4/3/01).

Amendment. The trial court reopened the stipulated judgment to award custody and child support more than one year after entry, because it had not provided for the 19 year-old daughter. At the reopening, she had graduated from high school but was unable to support herself. The Court of Appeals found that the only statutory basis for relief was under clause 5 (last of five) of M.S. 518.145 because more than one year had passed and the judgment was not claimed to be void. It cited the specific language of the clause describing a number of situations allowing reopening, none of which apply, followed by "or it is no longer equitable that the judgment … should have prospective application." The appellate court said that this instance appears equitably broader than the preceding listed instances when read alone. However, under the canon of construction known as ejusdem generis, where general language follows an enumeration of specific subjects, the general language is presumed to include only subjects of a class similar to those enumerated. The court concluded that the general language was intended to allow reopening only when necessary to relieve a party from an obligation that has been extinguished or otherwise to reduce or omit obligations; it was not intended to allow a court to later add a provision not addressed in the original judgment. The Court of Appeals concluded that the district court did not have authority to reopen the judgment to add newly determined obligations of custody and child support. Reversed as to custody, child support, and the imposition for failure to pay child support. Krech v. Krech, C4-00-1530, ___ N.W.2d ___ (Minn. App. 2001) (filed 4/10/01).

-- Hon. Eugene L. Kubes
Referee Judge, 2nd District, Ret
.

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FEDERAL PRACTICE
Judicial Law


Claim Preclusion in Diversity Cases. In Semtek International, Inc. v. Lockheed Martin Corp., 121 S. Ct. 1021 (2001), Semtek sued Lockheed in the California state courts. Lockheed removed the case to federal court on the basis of diversity, and then successfully moved to dismiss the case as untimely under California's two-year statute of limitations. Under California law, a dismissal on statute of limitations grounds doe not have claim-preclusive effect. Despite this fact, the dismissal order provided that the claims were dismissed "on the merits and with prejudice." Semtek appealed the dismissal to the 9th Circuit, but did not prevail.

After Semtek's California action was dismissed by the district court, Semtek sued Lockheed a second time in the Maryland state courts. While the second action was timely under Maryland law, the Maryland trial court dismissed Semtek's action on the basis of res judicata. The Maryland Court of Special Appeals affirmed the dismissal, finding that the issue of the preclusive effect of the California district court's order was a matter of federal law, and citing Fed. R. Civ. P. 41(b) for the proposition that the dismissal was an "adjudication upon the merits" and was therefore res judicata.

The question facing the Supreme Court was "whether the claim-preclusive effect of a federal judgment dismissing a diversity action on statute-of-limitations grounds is determined by the law of the State in which the federal court sits." Categorically rejecting the notion that Fed. R. Civ. P. 41(b) establishes the preclusive effect of federal judgments, the Supreme Court unanimously held that the preclusive effect of judgments in federal diversity actions is to be determined by reference to "the law that would be applied by state courts in the State in which the federal diversity court sits," in large part because any other rule would lead to "forum-shopping" as litigants might seek removal in order to avail themselves of different preclusion rules.

This decision resolves a split in the circuits, and should eliminate both attorney guesswork and forum shopping.

Recusal Motion; "Social Relationship". In Moran v. Clarke, 2001 WL 370216 (8th Cir. 2001), Moran sued the St. Louis Board of Police Commissioners and police officers and officials. Defendant Clarke acknowledged during her deposition that she had a social relationship with the trial judge, that they had known each other for more than 21 years, and that they had visited each others' homes up to ten times each. Relying on this information, Moran made a motion for recusal, which the district court denied without comment. Moran appealed.

While noting that the recusal decision is committed to the "sound discretion of the district court," and is to be reviewed only for abuse of discretion, the 8th Circuit was nevertheless "troubled" by the record before it. While the court did not question the judge and some defendants appearing at the same social events, the court was more troubled by the "social relationship" between the judge and defendant Clarke, finding that "[t]he image of one sitting in judgment over a friend's affairs would likely cause the average person to pause," and that the "friendship of sufficient duration as to warrant reciprocal visits to one another's homes only exacerbates the problem." The court also described as "worrisome" the district court's failure to disclose the potential conflict on its own. However, rather than reversing the district court's ruling on the recusal motion and remanding the matter to another judge, the 8th Circuit, noting its "utmost faith in the district court's ability to rule impartially" remanded the recusal question to the district court "with the suggestion that it revisit and more thoroughly consider and respond to Moran's recusal request."

Litigants rarely prevail on appeals from the denial of recusal motions. Nevertheless, given the tenor of the 8th Circuit's opinion, it is surprising that Moran did not prevail here. Perhaps, the 8th Circuit is expecting that the district court's "revisiting" of the issue on remand will eliminate the problem.

Attorney's Fees. In Kline v. City of Kansas City, 245 F.3d 707 (8th Cir. 2001), the 8th Circuit affirmed an attorney's fee award of $277,900 to a prevailing plaintiff in a Title VII action, even though the plaintiff obtained a judgment for only $47,100. Judge Loken dissented, believing that the plaintiff was entitled to no more than $115,800 in attorney's fees, a figure advanced by the defendants.

In Westendorp v. Independent School Dist. No. 273, 131 F. Supp. 1121 (D. Minn. 2000), Judge Doty awarded more than $200,000 in attorney's fees to a prevailing IDEA plaintiff who "prevailed completely" in the underlying litigation.

Cost Awards, Rule 11, and Expert Disclosures. In Sequa Corp. v. Cooper, 245 F.3d 1036 (8th Cir. 2001), the 8th Circuit held that district courts possess inherent authority to award costs to a defendant even after a plaintiff's voluntary dismissal of the action under Fed. R. Civ. P. 41(a)(1)(i).

In Granlund v. Northwest Airlines, Inc., 2001 WL 228444 (D. Minn. Mar. 5, 2001), Judge Frank imposed Rule 11 sanctions against both the plaintiff and his counsel. The plaintiff was sanctioned $500 based on a finding that he had perjured himself. Counsel for the plaintiff was sanctioned $500 for arguing that "social drinking" constituted a "protected activity" under the ADA.

In Duluth Lighthouse for the Blind v. C.G. Bretting Manufacturing Co., 199 F.R.D. 320 (D. Minn. 2000), Magistrate Judge Erickson held that an employee-expert not specially retained for litigation is not required to provide Fed. R. Civ. P. 26(a)(2)(B) expert disclosures. This decision is counter to Magistrate Judge Lebedoff's opinion in Minnesota Mining & Manufacturing v. Signtech USA, Ltd., 177 F.R.D. 459 (D. Minn. 1998), and is noteworthy for that reason.

-- Josh Jacobson
The Law Office of Josh Jacobson, PA

INTELLECTUAL PROPERTY
Judicial Law

General Releases. Two federal appellate courts, construing releases used in two intellectual property lawsuits, have held that broad prospective language of general releases can broadly preclude enforcement of future rights relating to the subject matter of the lawsuit. The courts made clear that the releasing party must carve out any intent to assert against the released party potential claims relating to the subject matter of the lawsuit that were known or should have been known. This is true whether such claims existed at the time of the release or not.

In Augustine Medical, Inc. v. Progressive Dynamics, Inc., 194 F.3d 1367 (Fed. Cir. 1999), the Court of Appeals for the Federal Circuit affirmed a Minnesota federal district court's holding that a general release prohibited Augustine from enforcing patent claims on technology which had been at issue in an earlier unfair competition case between the same parties. In the earlier lawsuit, the parties entered into a settlement agreement in which Augustine agreed to "release and forever discharge Progressive from any and all action or actions … that Augustine and/or its owners … have, have had, or may have against Progressive … ." The appellate court held that " [i]t is the burden of the parties entering into a settlement agreement to expressly reserve in the agreement any rights that they wish to maintain beyond the date of the settlement agreement." Relying on the 8th Circuit decision Press Mach. Corp. v. Smith R.P.M. Corp., 727 F.2d 781 (8th Cir. 1984), the court found that because Augustine had knowledge of Progressive's alleged infringing activity at the time the release was signed and its patents had issued, the prospective language of the release barred Augustine from alleging patent infringement against Progressive because it did not expressly reserve that claim.

In Press Mach. Corp., supra, the appellate court affirmed a district court's holding that a broad general release prohibited enforcement of a patent, which issued after a settlement agreement between the two parties concerning trade secret litigation. The settlement agreement ending the trade secret claims involved the same technology at issue in the subsequent patent litigation and released both parties from "all claims, rights of action, … which the parties hereto now have or under any circumstances could or might have, … pertaining to the agreements and matters referred to in [the pleadings]." The district court held that the earlier settlement agreement barred Smith from asserting its patent against Press Machine Corp. (PMC). In affirming, the appellate court determined that the settlement agreement was intended to allow PMC to continue manufacturing, marketing and installing its system despite the patent rights of Smith which arose after the agreement. Considering the prospective language used in the settlement agreement, to wit "could or might have," the court held that the general release was not limited to the cause of action then at issue, nor was it limited to resolving past disputes. Instead, said the court, the agreement was an attempt to resolve finally those disputes then at issue and those that might arise in the future related to the subject matter of the suit.

-- Anthony R. Zeuli
-- Joshua N. Randall
Merchant & Gould

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PROBATE AND TRUST LAW
Judicial Law

Parol Evidence Admissible. Decedent's will left "the sum of Two Hundred Thousand Dollars ($25,000)" to a beneficiary. The Court of Appeals determined that the scrivener's testimony would be allowed to resolve the contradictory provisions in the will. The court criticized the historical distinction between patent and latent ambiguities, and found nothing in Minnesota law prohibiting evidence of a testator's intent. Instead, the court imposed two limitations on the evidence. First, the surrounding circumstances must be examined, and if the ambiguity or contradiction persists, then the court may consider direct evidence of the testator's intent. Second, extrinsic evidence may only be used to determine what was meant by the words used, and not to determine an intent that cannot be found in the words. In re: Estate of Cole, C4-00-1172, 621 N.W.2d 816 (Minn. App. 2001) (filed February 13, 2001).

Service of Summons and Complaint. Decedent was involved in an automobile accident. Decedent died before respondent served her with a summons and complaint. Respondent therefore attempted to serve decedent's husband, personally and as personal representative of the estate. However, there was no probate, and the husband was never appointed personal representative. The Court of Appeals ruled that a claim may only be brought against an individual, or the personal representative of such individual's estate. The husband had no responsibility for the occurrence, so service upon him was of no legal significance. Van Slooten v. Estate of Schneider-Janzen, C6-00-1268, 623 N.W.2d 269 (Minn. App. 2001) (filed March 6, 2001).

Funds Placed in Another's Account. Prior to death, decedent placed $250,000 into the bank account of a man she knew for 30 years and lived with for the last six years. Decedent had entered a nursing home, but remained mentally competent. With decedent's full knowledge and consent, a portion of the funds were used for vehicles and home improvements. After decedent's death, her daughter sued for return of the funds. The District Court found in the daughter's favor, and the Court of Appeals reversed. Up until now, Minnesota has not had any case law on this issue. The Court of Appeals determined that once decedent transfers funds to another person's sole account, that person becomes the presumptive legal owner and can use them for any purpose. The presumption can only be overcome by a finding of fraud, theft, conversion, or other wrongful act. The burden of proof is now on the person contesting the transfer. In re: Estate of Whish v. Bienfang, C2-00-1705, 622 N.W.2d 847 (Minn. App. 2001) (filed March 1, 32001).

Trust Accounting. Trustees provided an accounting of the assets and transfers to the trust beneficiaries, pursuant to a court order. The documentation explained that the stock was sold to cover decedent's expenses and attorney fees. The Court of Appeals found that the district court's finding that the accounting was adequate was supported by the evidence. In re: Trust of Baker, C2-00-1204, 2001 WL 379927 (Minn. App. 2001) (filed April 17, 2001).

-- Tonya Zdon Gabbard
Garvey & Boggio, P.A.

REAL PROPERTY
Judicial Law

Watershed Law. Watershed District hired a contractor to improve an existing ditch that had fallen into disrepair. The ditch was designed to withstand a ten-year event. After heavy rainfall, the ditch overflowed causing property damage. Wear sued the Watershed District on the theory that it negligently improved the ditch. After a bench trial, the district court ruled in favor of the Watershed District. On appeal, the Court of Appeals affirmed, holding that the Watershed District did not breach its duty to improve a ditch by constructing it to withstand a ten-year event. By doing so, it rejected Wear's argument that the purpose of the construction was to prevent all crop loss. Wear v. Buffalo-Red River Watershed District C0-00-908, 621 N.W.2d 811 (Minn. App. 2001) (filed Feb. 13, 2001).

Real Property; Mechanic's Lien Statement; Notice of Review. Murr Plumbing (Murr) filed a mechanic's lien against property that included an incorrect legal description but correct street address. Seven months letter Murr corrected the error and filed an amended lien statement. The property was sold in a mortgage foreclosure sale and Murr and respondent lien claimants each separately paid the required redemption amount. When they were unable to agree on the percentage of ownership, respondents commenced a proceeding subsequent to initial registration of land seeking a determination that Murr's lien statement was invalid and directing issuance of a new certificate. The district court determined that Murr's lien statement was valid. On the eve of the second trial to determine the remaining issues, the trial court advised the parties over Murr's objection that it would also determine the relative percentage ownership of each. On appeal, the Court of Appeals held that the proceedings subsequent to initial registration were proper proceedings in which to determine ownership, but reversed the trial court determination of percentage ownership because Murr did not have sufficient notice that it would become an issue at trial. Therefore, its rights to due process were denied. Because respondents did not file a notice of review regarding the validity of Murr's lien, that issue was not properly before the court and was not considered. In the Matter of the Petition of Metro Siding, Inc., et al, C2-00-1123, 624 N.W.2d 811 (Minn. App. 2001) (filed Apr. 3, 2001).

Township Law. Horton owns real property located in the Township of Helen (township). Horton petitioned the township to establish a cartway to connect his land with the township road pursuant to Minn. Stat. ¤ 164.08, subd. 2. Following a hearing, the township denied the petition. Horton then petitioned the district court for writ of mandamus to compel the township to grant his petition. The district court affirmed summary judgment in favor of the township. On appeal, the Court of Appeals rejected the township's argument that the district court lacked subject matter jurisdiction and that the case should have been appealed by writ of certiorari to the Court of Appeals. The court nevertheless held that summary judgment for the township was appropriate where the township's denial of Horton's petition for a cartway was not clearly against the evidence, based on an erroneous theory of law, or arbitrary, capricious, or against the public's best interests. Horton v. Township of Helen, C4-00-1480 624 N.W.2d 591 (Minn. App. 2001) (filed Apr. 3, 2001).

Assessment Agreements. Lake Superior Paper Industries (LSPI) and the city entered into a development agreement whereby LSPI agreed to build a paper mill on blighted industrial waterfront property. In December, 1987 LSPI and the city signed a certificate of completion and continuation agreement. In January 1991, LSPI signed an assessment agreement which set forth the minimum market value of LSPI's paper mill and the underlying and surrounding real estate. In November 1996, LSPI requested the city to adjust the paper mill's minimum market value, the city refused, and this challenge followed. On cross motions for summary judgment, the Minnesota Tax Court granted the city's motion for summary judgment, concluding that the assessment agreement was valid, that the city did not unreasonably withhold its consent to grant a downward adjustment, and that the assessor's certification of the paper mill's minimum value was valid.

The Supreme Court affirmed, holding that the tax court did not err in finding that the city did not unreasonably withhold its consent to grant a downward adjustment of the paper mill's minimum market value. The Supreme Court concluded that the tax court was correct in determining that the assembly and acquisition of land on which the improvements were to be constructed was not completed in January, 1991, the date of the assessment agreement and that LSPI had not completed the final plat and title work. Therefore, the assessment agreement was in compliance with Minn. Stat. ¤ 469.177, subd. 8. Finally, the Supreme Court concluded that the assessor had complied with the statute in certifying the value of the property. Lake Superior Paper Industries v. State of Minnesota and County of St. Louis, C0-00-598, 624 N.W.2d 254 (Minn. 2001) (filed Apr. 5, 2001).

Tax Law: Constitutionality. Taxpayers challenged the constitutionality of the Taconite Tax Relief Area Fiscal Disparities Act (Range Act), Minn. Stat. ¤ 276.A.01-09 (2000) contending that it violates the uniformity clause of the Minnesota Constitution. The district court found the Range Act unconstitutional and the state and the affected counties appealed. Under the Range Act, a municipality that is within the Taconite Tax Relief Area (TTRA) must contribute 40 percent of the revenues derived from annual growth of its commercial industrial property tax base to a regional pool. The effect is a redistribution of tax revenues throughout the region. On appeal, the appellate court reversed, holding that the Range Act was constitutional and satisfied the uniformity clause of the Minnesota Constitution. Jeffrey Walker, et al. v. Itasca County Auditor Robert Zuehlke, et al., C9-00-1863 624 N.W.2d 599 (Minn. App. 2001) (filed Apr. 10, 2001).

Zoning. In 1983, Johnson was granted a conditional use permit to operate the property as a commercial stable and riding academy. Subsequently, Blue Earth County (county) issued Johnson a corresponding feed lot permit. In February 2000, the county adopted a new shoreland ordinance, and the Johnson feed lot became a permitted nonconforming use. In April 2000, a fire destroyed one of three horse barns on the Johnson property. Johnson applied for a variance to reconstruct the horse barn, which was granted after a public hearing but was contingent on the issuance of a new conditional use permit authorizing the reconstruction of the barn. Subsequently, the county issued the conditional use permit. By writ of certiorari, Buss challenged the county's grant of the conditional use permit. On appeal, the appellate court concluded that the county ordinance that allows rebuilding of a nonconforming structure was inconsistent with Minn. Stat. ¤ 394.36, subd. 1, which restricts restoration or repair of a building when it has been destroyed to an extent of 50 percent or more of its market value. In a lengthy analysis, the appellate court concluded that under Minn. Stat. ¤ 394.36, subd. 1, the percentage of destruction may be determined after a consideration of the entire market value of the nonconforming use of which a building is a part, not a consideration of the market value of the destroyed building alone. Finally, it held that given the exclusive variance power of the county board of adjustment to depart from the requirements of Minn. Stat. ¤ 394.36, subd. 1, the board did not act arbitrarily or unreasonably by disregarding the statute's limitations on nonconformities in reaching its decision to grant a conditional use permit. Therefore, the decision of the county was affirmed. Buss v. Johnson, C2-00-1395 624 N.W.2d 781 (Minn. App. 2001) (filed Apr. 3, 2001).

Nuisance: Gun Club. Since 1951, Lone Oak Sportsmen's Club (Lone Oak) has operated four shooting ranges on 11 acres of property zoned A-2 (agricultural and residential). Currently, it is surrounded on all sides by privately owned residential property and a protected wetland. Respondent Citizens for a Safe Grant (Citizens) consists of several families living in the vicinity of the shooting range. In 1985 the Grant Town Board (Grant) adopted an ordinance regulating the use of firearms which is applicable to the Loan Oak property. In its declaratory judgment action against Grant and Loan Oak, Citizens allege trespass on their properties, nuisance, and violation of the Minnesota Environmental Rights Act (MERA). Minn. Stat. Ch. 116B. After a six-day trial, the district court concluded that Lone Oak had created a nuisance, trespassed on Citizens' property and violated MERA and granted a permanent injunction. On appeal in a 2-1 decision, the appellate court affirmed, concluding that the trial court properly determined that the statute of limitations had not run because a new offense arose each time the shooting range was used without the provision of safety features or sound abatement, that Lone Oak had created a nuisance, had committed a trespass by the entry of bullets over and onto adjacent private property resulting from the operation of the rifle ranges, and had violated MERA. The dissent concurred with the majority regarding the statute of limitations and trespass claims, but disagreed with the majority on finding a MERA violation based on the degradation of quietude caused by impulsive sound and that noise levels are sufficient to establish a nuisance claim. The dissent would remand the permanent injunction to the district court with instructions on the basis that Citizens had failed to carry their burden of establishing a MERA violation. Citizens for a Safe Grant, et al. v. Lone Oak Sportsmen's Club, Inc. C9-00-1247, 624 N.W.2d 796 (Minn. App. 2001) (filed Apr. 17, 2001).

-- Chris Dietzen
Larkin, Hoffman Daly & Lindgren Ltd.

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TAX
Judicial Law

Back Pay. The United States Supreme Court holds that back pay resulting from a settlement of grievances concerning free agency rights was attributed to the year it was actually paid. Although a different interpretation applied in the context of social security benefits, back wages paid by respondent were attributable to the year in which they were actually paid for purposes of respondent's employer tax. Accordingly, the judgment of the 6th Circuit is reversed. United States v. Cleveland Indians Baseball Co., 00-203, U.S. Supreme Court, 2001 U.S. LEXIS 3203, April 17, 2001.

Capital Gains & Losses; Patronage Income. The IRS acquiesced in the Tax Court's determination that a nonexempt agricultural cooperative realized patronage income and losses in connection with its sale of stock and miscellaneous depreciable business assets. The income was produced by transactions that were directly related to the cooperative enterprise and facilitated the taxpayer's marketing, purchasing or service activities. The court applied a fact-intensive "directly related" test and rejected the IRS's per se rule that capital gains and losses (Code Sec. 1231) never qualify as patronage income. 2001R.E.D. ¦46, 375, 2001 TAXDAY, 3/26/01.

Property Tax: 60-Day Rule; Assessment. Petitioner's challenge that because of subsequent purchase of property, property should be assessed as owner-occupied rather than income producing was dismissed. The subject property was found to be income producing for purposes of the 60-Day Rule and the information submitted by petitioner was found insufficient because the total rent paid was information available to petitioner but was not made known to respondent. Kmart Corp. v. County of Becker, C2-00-395, Minn. Tax Ct., 2001 Minn. Tax LEXIS 12, March 16, 2001.

Property Tax: 60-Day Rule. The 60-Day Rule requires the owners of income-producing property to provide the assessor with actual and anticipated income and expenses and verified net rentable areas within 60 day after filing a petition. Property owners do not have to provide the county assessor with information about business operations within 60 days of filing a review petition. FACS of New Ulm, Minn. Tax Ct. CX-00-22, 2001.

Decedent's Trust; Innocent Spouse Relief. Under Code Sec. 6015(e), the nonelecting spouse is permitted to participate at the administrative level and, after a determination is made, during judicial review. Thus, the trustee and successor in interest to a decedent's trust was entitled to litigate in the Tax Court the IRS's grant of innocent spouse relief to the decedent's exwife with respect to deficiencies and penalties assessed against the couple for one of the tax years at issue. Hale Exemption Trust, 2001 TAXDAY, 4/12/01.

Voluntary Failure to File Tax Returns; Discharge of Taxes in Bankruptcy. Petitioner's failure to voluntarily file his tax returns caused the returns to lose their "required" status under bankruptcy law. The failure to timely file returns caused the IRS to compute taxes from alternative sources, prepare substitute returns, issue deficiency notices, and assess taxes against petitioner. Once an involuntary assessment was final, Petitioner could not use the filing of the belated returns to subject a stale tax claim to discharge. David P. Walsh v. United States, et al., (In re David P. Walsh), 87 AFTR2d Par. 2001-840, 97-33916, 2001 TNT 82-23 (D. Minn.: Bankr'cy) March 29, 2001.

Property Tax: Purely Public Charity Exemption. In a case involving a dispute over the tax-exempt status under Minn. Stat. ¤ 272.02 of one of Cook Area Health Services, Inc.'s properties located in the Cook, Minnesota, the six factors of the North Star test were applied. North Star Research Inst. v. County of Hennepin, 306 Minn. 1, 6, 236 N.W.2d 754, 757 (Minn. 1975). Additionally, with respect to factor number five, the Supreme Court has recognized a separate subfactor -- whether or not the organization's undertaking "lessens the burdens of government." Cook Area Health Services, Inc. v. County of St. Louis, 2001 WL 428623, Minn. Tax, 2001, April 27, 2001.

MN Alternative Minimum Tax; Gambling Losses. For the purpose of computing federal alternative minimum tax ("AMT") income, one may deduct gambling losses in an amount up to the amount of gambling gains in the tax year. 26 U.S.C. ¤ 165(d). Under Minnesota law, however, a more limited number of items are excluded from computation of the Minnesota AMT. These items include charitable contributions, allowable medical expenses and state tax deductions, among other items. Minn. Stat. ¤ 290.091, subd. 2 (1996). Gambling losses are not included in the list of items to be excluded. Anderson v. Commissioner of Revenue, 2001 WL 428625, Minn. Tax, 2001, April 25, 2001.

Taconite Tax Relief Area Fiscal Disparities Act. Taxpayers challenged the constitutionality of the Taconite Tax Relief Area Fiscal Disparities Act, Minn.Stat. ¤¤ 276A. 01-09 (2000), contending that it violates the uniformity clause of the Minnesota Constitution. Minn. Const. Art X, ¤ 1. The benefits derived from an existing tax can be considered to justify the burdens of a new tax and the Range Act, as an outgrowth of taconite production tax revenue sharing, satisfies the uniformity clause of the Minnesota Constitution. Walker v. Itasca County Auditor, 2001 WL 345624, Minn.App., 2001, April 10, 2001.

Two-Tier Residential Homestead Provision. Decided under the doctrine of stare decisis the two- tiered taxing system has already been found to be constitutional in Lund (1987). Also, under full analysis, the two-tier residential homestead provision, Minn.Stat. ¤ 273.13, subd. 22(a), is consistent with Art. X ¤ 1 of the Minnesota Constitution and the 14th Amendment of the United States Constitution. Lund v. County of Hennepin, 2001 WL 356030, Minn. Tax., 2001, April 6, 2001.

Claims to Stolen Assets; Priority; Tax Liens. Credit Bancorp operated a fraudulent investment or "Ponzi" scheme and the Securities and Exchange Commission sued the bank. U.S. District Court (S.D.N.Y.) has held that bank customers' assets that were invested in a fraudulent Ponzi scheme and were held in a receivership estate must be returned to the victims before the satisfaction of any federal tax liens. Securities and Exchange Commission, et al. v. Credit Bancorp Inc., et al., 87 AFTR2d Par. 2001-815, 99 Civ. 11395 (RWS), (DC: S.D.N.Y.), 2001 TNT 78-73, April 6, 2001.

Loan from Qualified Plan; Taxable Distribution. A loan received by an attorney from the firm's pension plan constituted a taxable distribution under Code Sec. 72(p) because terms of promissory note violated the five-year repayment requirement. C.W. Plotkin, Dec. 54,285(M), 2001 TAXDAY, 3/36/01.

Cert. Denied. The United States Supreme Court denied certiorari in five cases concerning harbor maintenance tax, wrongful termination awards and attorney's fees, federal jurisdiction, state tax partnership losses, a contract case on rapid refunds, earned income credit, and a constructive trust imposed upon realty and denied a rehearing in a wrongful collection action. 2001 TNT 7-2, News, Commentary and Analysis, April 17, 2001 and 2001 TAXDAY, 4/24/01.

Gain; Transfer of Farm Equipment; Wholly Owned Corporation. Family members who transferred farm equipment and property to their wholly owned corporation had to recognize gain on the transfers under Code Sec. 357. Even though the shareholders remained personally liable for the payment of the liabilities on the transferred property, Code Sec. 357(c)(1) did not grant them relief from recognition of the gain. Saggerman Farms, Inc., Dec. 54,320(M), TAXDAY 4/26/01.

Farm Equipment Dealer; Installment Method of Accounting.
A dealer in farming equipment was not entitled to report gains from the sales of irrigation equipment on the installment method. The "farm property exception" of Code Sec. 453 did not apply. J.L. Thom, (DC: Neb.), 2001-1 USTC par. 50,345.

Interest Imputed on Loans. Corporation that made direct and indirect loans to minority shareholders was subject to Code Sec. 7872(c)(1)(C). Interest was thus imputed to both the direct and indirect loans. Rountree Cotton Co., Inc., (10th Cir.) 2001-1 USTC par.50,316.

Administrative Law

Late Returns; "Mailbox Rule" Exception. Chief Counsel Notice CC-2001-019 announces a change in the IRS's litigation position with respect to the application of the mailbox rule exception to refund claims made on original income tax returns that are filed late. The mailbox rule will treat claims for refunds included on delinquent original returns as filed on the date of mailing. Also included are returns such as Form 1120, Corporate Income Tax Return, Form 720, Quarter Federal Excise Return, Form 2290, Heavy Vehicle Use Tax Return and Form 706 U.S. Estate Tax Return. The change in litigation position is reflected in Reg. Sec. 301.7502-1(f). 2001 TAXDAY, 3/26/01.

Innocent Spouse Relief; eitc. The IRS Letter Ruling 200112001 notes a disallowed earned income credit can give rise to a tax understatement. Where an understatement is due to an erroneous earned income tax credit EITC claim, a taxpayer would be entitled to ¤ 6015(b) relief in the substantial understatement is not attributable to the taxpayer and the taxpayer met all the conditions for relief under ¤ 6015(b). Where a requesting spouse qualifies for relief with respect to a tax liability attributable to a disallowance of an EITC claim due to the unreported income of the other spouse, the requesting spouse is not entitled to the EITC if the omitted income cause the joint adjusted modified gross income to trigger a complete phase out the EITC. IRS Letter Rulings Report No. 1256, (CCH) 3/28/01.

Exemption Rulings; Section 501. The IRS on April 16 released 13 exemption rulings issued by the national office's Exempt Organizations Technical Division recognizing Section 501(c)(3) - Charities. 2001 TNT 74-5, News, Commentary, and Analysis; News Stories, April 17, 2001.

Settlement Payments; Interest Expense Deduction. The Service has ruled in technical advice that a corporation can't deduct as interest expense any part of the settlement payments it made to the children of the corporation's founder as part of stock redemption litigation that the children initiated. The corporation could only claim a Section 163 interest deduction if the interest was on indebtedness. Because that was not the case here, the corporation couldn't deduct any part of the payments as interest expense. 2001 TNT 78-20, Administrative Rulings; IRS Technical Advice Memoranda, April 23, 2001.

Innocent Spouse Election; Executor. Chief Counsel concludes in an FSA that an executor may not make an innocent spouse election on behalf of a deceased spouse. If an election had been made during the spouse's lifetime, executor may pursue the claim. FSA 200117005.

Statute of Limitations; Tax Shelter Penalty. The penalty assessed against the promoter of a tax shelter was not subject to a statute of limitations. The penalty is not a return based penalty, therefore it may be assessed at any time. CCA Letter Ruling 200112003.

30-Day Termination Letter; Reinstatement of Offer. Chief Counsel concludes that once a 30-day termination letter is issued, it cannot be reinstated. A new agreement must be executed. CCA 200113031.

Lease Agreement; Construction Allowance; Safe Harbor. Lease agreement that did not allocate entire construction allowance to the construction or improvement of qualified long-term property satisfied the "purpose requirement" of Regulation Sec. 1.110-1(b)(3). The portion of the construction allowance in the lease that is actually expended on qualified long-term realty will qualify as exclusions from income under the safe harbor provisions of Code Sec. 110(a). Rev. Rul. 2001-20.

Corrections to Regulations. IRS has released corrections to final and temporary regulations concerning Code Sec. 125, Code Sec. 132, Code Sec. 338, Code Sec. 864(e)(5) and (6), Code Sec. 904, Code Sec. 1060, Code Sec. 1461 through 1463, Code Sec. 2601 and Code Sec. 6205. IRS has corrected proposed regulations concerning Code Sec. 263, Code Sec.1092, Code Sec. 6013 and Code Sec. 6015.

Legislation

Homestead Refund Claims. Effective August 1, 2001, a Minnesota real property tax homestead refund claim under the Property Tax Refund Act is not allowed if taxpayer files the initial claim more than one year after the original due date. 2001 TAXDAY, 4/10/01.

Family Farm Protection Act (Proposed H.R. 1179).
The gain on the sale of a farming business to a family member would be excluded from gross income in H.R. 1179, introduced by Rep. Mark Green, R-Wis.. 2001 TNT 76-75, Statutes, Legislation, and Legislative History; Proposed Legislation. April, 19, 2001.

Tax on Tips (Proposed H.R. 1274). Rep. Duncan Hunter, R-Calif., introduced H.R. 1274, which would provide that tips received for cosmetology, hospitality, recreation, taxi, newspaper delivery and shoeshine services would not be subject to income or employment taxes; tips up to $ 10,000 per year would be considered "property transferred by gift" and remain tax-free. 2001 TNT 82-87, Statutes, Legislation, and Legislative History; Congressional Record, April 27, 2001.

Maximum Allowable Contribution: IRAs; (Proposed H.R. 1026). The bill would provide individuals a nonrefundable credit for elective deferrals and IRA contributions. The credit would be 50 percent for taxpayers with AGI up to $10,000 ($20,000 for joint filers) and would phase out as AGI increases, disappearing entirely for those with AGI over $25,000 ($50,000 for joint filers). The bill also provides for $7,500 catch-up contributions to IRAs by taxpayers age 50 or older. 2001 TNT 73-82, Statutes, Legislation, and Legislative History; Proposed Legislation, April 16, 2001.

Death Tax Elimination Act; (Proposed H.R. 8). The bill would also phase out generation-skipping transfer taxes over ten years. The bill has dozens of original cosponsors. 2001 TNT 71-62, Statutes, Legislation, and Legislative History; Congressional Record, April 12, 2001.

Tourism Revitalization Act (Proposed H.R. 1211), introduced by Rep. Neil Abercrombie, D-Hawaii, would restore to 100 percent the deduction for business meals and entertainment and would restore the deduction for the travel expenses of a spouse who accompanies the taxpayer on business travel. 2001 TNT 82-100, March 27, 2001.

Teacher Relief Act (Proposed H.R. 1224). The Teacher Relief Act of 2001 would allow an above-the-line deduction for up to $400 in qualified incidental job-related expenses such as books, supplies, and equipment. 2001 TNT 82-102, March 27, 2001.

Health Care Coverage; Near Elderly (Proposed H.R. 1255). The bill would improve access to Medicare and COBRA continuation benefits for early retirees, displaced workers close to retirement age, and retired workers who lose health coverage. The Medicare Early Access and Tax Credit Act of 2001 would also let persons 62 to 65 years old with no access to health insurance buy into Medicare by paying a base premium during pre-Medicare-eligibility years and a deferred premium during their post-65 Medicare enrollment. Individuals 55 to 62 years of age who have been laid off and have no access to health insurance could buy into Medicare with a monthly premium. And retirees 55 or older whose employer-sponsored coverage is terminated could buy into their employer's health insurance for active workers at 125 percent of the group rate. 2001 TNT 82-106, March 27, 2001.

"Qualified Technological Equipment"; Telecommunications Equipment. H.R. 1268 would include wireless telecommunications equipment in the definition of qualified technological equipment for determining its depreciation. Currently there is no definitive guidance regarding the class lives and recovery of cellular assets. The proposed definition would reflect the current IRS definition of qualified technological equipment -- "any computer or peripheral equipment and any high technology telephone station equipment installed on a customer's premises." 2001 TNT 82-116, March 28, 2001.

Energy-Efficient Property. H.R. 1275 would allow a credit against income tax for certain energy-efficient property, for businesses defined as a stationary fuel cell power plant that generates electricity using an electrochemical process and has an electricity-only generation efficiency greater than 30 percent. The credit would also be available for nonbusiness energy-efficient building property as defined in section 48(a)(4). 2110 TNT 82-119, March 28, 2001.

Looking Ahead

Priority Guidance List. The 2001 Priority Guidance List indicates tax regulations and other administrative guidance that the government expects to publish by year-end. 2001 TNT 82-1, April 26, 2001.

Alternative Minimum Tax; Code Simplification. The tax code would be simpler if lawmakers eliminate the alternative minimum tax, repeal phase-ins and phase-outs, and adopt a uniform definition of qualifying child, according to witnesses at an April 26 Senate Finance hearing on tax simplification. Lawmakers agreed they need to do something about the tax code. The Joint Committee on Taxation on April 26 issued a 1,300-page report in three volumes detailing ways to make the Internal Revenue Code less of a headache for taxpayers. The report includes 150 simplification recommendations and witnesses from tax professionals' groups commented and added their own. 2001 TNT 82-2, April 26, 2001.

-- Kathryn J. Sedo
-- Andrew G. Beckord
University of Minnesota Law School

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Torts & Insurance
Judicial Law

Dog Owner Liability. Kent agreed to feed, water, and exercise Block's dog while Block went on a one-week vacation. On the first day of the vacation, Kent walked the dog with a leash, the dog bolted, and pulled Kent's shoulder out of joint.

Kent sued Block (her employer) under the dog-owner liability statute, Minn. Stat. 347.22 (1999). The parties filed cross motions for summary judgment. The trial court granted Block's motion because "keepers" of dogs are outside the scope of the statute, and Kent was a "keeper" under the statute. The Minnesota Court of Appeals affirmed, because "keeping" equates acceptance of temporary responsibility for the dog. Kent v. Block, C3-00-1700, 623 N.W.2d 906 (Minn. App. 2001) (filed March 27, 2001.

Dangerous Trees; Duty to Warn. Rolfhus was seriously injured at a Wright County park after a tree branch broke and struck her following a summer storm. She and her husband sued the county and Green View, Inc., a nonprofit organization that provides senior citizens with maintenance work at parks. The trial court granted immunity to the county, and determined Green View had no duty to inspect or warn patrons of dangerous trees, thus granting summary judgment.

The Minnesota Court of Appeals affirmed, though Rolfhus appealed only the grant of summary judgment to Green View. Testimony suggested it was the county's duty to inspect and warn of tree dangers. Therefore, an affirmance was granted. Rolfhus v. County of Wright, C2-00-1784, 2001 WL 290525 (Minn. App. 2001) (filed March 27, 2001) (unpublished).

No-Fault Indemnity. Minnesota Statute 65B.53, subd. 1 allows a reparation obligor paying economic loss benefits to obtain indemnity from an insurance company providing residual liability coverage in certain circumstances, i.e., if the liability insurer was covering a commercial vehicle whose driver was negligent in causing the accident.

In this case, a Minnesota resident insured by State Farm was driving his pickup truck on Interstate 80 in Nevada when he was rear-ended by a semi-tractor trailer. Great-West insured the semi under a Nebraska commercial motor vehicle policy issued to a Nebraska resident.
State Farm paid no-fault benefits and sought indemnification under M.S. ¤ 65B.53, subd. 1. The arbitrator and the Court of Appeals determined that Great-West was required to indemnify State Farm because the indemnification statute contained no language restricting it to accidents in Minnesota.

The Minnesota Supreme Court reversed, holding that although the indemnification statute itself does not contain language restricting it to accidents in Minnesota, it must be read in conjunction with other provisions of the No-Fault Act, and when placed in context, indemnification is not allowed for this out of state accident. State Farm Mutual Automobile Insurance Company v. Great-West Casualty Company, C9-00-566, 623 N.W.2d 894 (Minn. 2001)

No-Fault Act Tort Thresholds. In this case, the Minnesota Court of Appeals held that the tort thresholds as found in Minnesota Statute 65B.51, subd. 1, 3, do not apply when an insured seeks to recover non-economic damages under his uninsured motorist coverage for an accident between the insured's vehicle and a negligent, uninsured motorcycle driver. Braginsky v. State Farm Mutual Automobile Insurance Company, C3-00-1096, 624 N.W.2d 789 (Minn. App. 2001).

--Thomas C. Baudler
-- Lee A. Bjorndal
Baudler Baudler Maus & Blahnik PA

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